By Zacharias Kapsis
The Tax Department has introduced new procedures regarding the leasing from December 23, 2019, onwards of recreational vessel owning companies registered on the VAT Registry.
The Interpretative Circular 240 (VAT Tax) refers to Cypriot companies which operate in the sector of leasing pleasure yachts and complies with compliance with the European and Cypriot law and most importantly are approved by the European Commission.
According to the Circular:
- The legal entities (companies) which operate in the sector of leasing pleasure yachts in Cyprus shall be registered in the Cyprus Tax Department (possessing a valid Cyprus VAT identification number), only in case there is appropriate evidence which justifies such business activity.
- All the leasing agreements which will be provided for the aforementioned reason shall be scrutinised on whether they, in fact, provide leasing services (supply of service) for each of the leisure yachts. The final decision for the classification of leasing leisure yachts as providing such services will depend on the terms of the agreement between the lessor and lessee, as decided by the Court of Justice of the European Union (CJEU) in the case C-146/16 Mercedes-Benz Financial Services UK Ltd.
In accordance with the CJEU decision in the aforesaid case, agreements on purchase/lease of goods (including transportation means and leisure yachts), which:
- provide to the lessee the option to purchase the good, and
- under the financial terms of the agreement, the exercise of the right to purchase seems to be the only economically rational choice, concern delivery of goods for taxation purposes and not the supply of services.
In all the other instances where the aforementioned do not apply, the leasing will be considered as a supply of services.
Prior to the Mercedes case, the lessee was able to exercise an option to purchase by paying a substantial additional sum and therefore the goods are not acquired automatically if performance of the contract proceeds normally.
Following the aforementioned analysis, the CJEU ruled that “the words ‘contract for hire which provides that in the normal course of events ownership is to pass at the latest upon payment of the final instalment’, used in Article 14(2)(b) of the VAT Directive, must be interpreted as applying to a leasing contract with an option to purchase if it can be inferred from the financial terms of the contract that exercising the option appears to be the only economically rational choice that the lessee will be able to make at the appropriate time if the contract is performed for its full term, which it is for the national court to ascertain”.
- To determine the place of supply of those services and specifically that the supply of the said services takes place outside the European Union, the provisions of paragraph 3 (short-term leasing) and paragraph 14A (long-term leasing) of the Thirteenth Schedule of the Cypriot VAT Law of 2000 (Law 95(I)/2000), as amended, shall be applied. The aforementioned provisions correspond to article 59a of the VAT Directive 2006/112/EC. For this purpose, the lessor shall maintain detailed and sufficient evidence on the basis of which the percentage of use and enjoyment of the yacht within or outside the European Union will be calculated. The evidence shall be confirmed by the yacht’s geotracking system (if existent on board) and/or the bridge/dock book. In such circumstances, in any case, where the yacht has a geotracking system in operation, this will take precedence over any handwritten logbook.
- Also, the application of the rule regarding substantial use and enjoyment mentioned in paragraph 3, will be used only if its application is within the context of fiscal neutrality and proportionality, that is, to avoid double taxation, non-taxation or distortions of competition. In cases where this rule is justifiably applied, it should be clarified that “use and enjoyment” of the yacht does not entail only the actual time of navigation, but also the time spent on board.
- Given that the legal entity (company) which operates in the sector of leasing pleasure yachts in Cyprus is registered in the Cyprus Tax Department, the Tax Commissioner of Cyprus taking into account all relevant evidence provided by the lessor, may, for the purposes of protection of public revenue, request the payment of the whole amount of VAT, which is based on the market value of the pleasure yacht on the date of its acquisition or its importation in the Republic. Once the relevant evidence is placed before the Tax Commissioner, explicitly confirming the use and enjoyment of the pleasure yacht outside the European Union, the Commissioner shall proceed, at a subsequent stage, to the appropriate adjustments derived from the provisions of the VAT Law.
- However, to proceed to such appropriate adjustments, the Commissioner must first confirm that the yacht is effectively used for the purposes of commercial activity. Furthermore, apart from the relevant logbooks and files which have to be kept, it is also compulsory for the lessor to keep a bridge/dock book (if kept by hand), otherwise, there must be an ongoing geotracking system of the yacht, tracking her movement.
- Under no circumstances may a company be registered in the VAT Registry of Cypriot companies which operate in the sector of leasing pleasure yachts, on the basis of pre-determined fixed percentages of the use and enjoyment of a pleasure yacht, within or outside the EU.
Zacharias Kapsis is a shipping lawyer at A. Karitzis & Associates L.L.C, Limassol. He specialises in maritime law and member of the Navigation Committee of the Cyprus Bar Association. [email protected].